New
Times nailedSF Weekly's
parent company charged with violating antitrust law.

By Savannah Blackwell

THE PARENT COMPANY
of the SF Weekly and the owner of New York City's Village Voice illegally colluded to shut down newspapers in Los Angeles and Cleveland in a scheme to avoid competing against each other, federal and state officials formally charged in a complaint filed Jan. 27.

The U.S. Department of Justice,the California and Ohio Attorney General's Offices, and the Los Angeles District Attorney's Officecharged that in October 2002, New Times Media and Village Voice Media cut an illegal deal under which New Times would close its Los Angeles paper if VVM would shutter its weekly in Cleveland. This left New Times with a monopoly in Cleveland and VVM with a monopoly in Los Angeles.

Readers and advertisers got screwed.

"Faced with the prospect of a protracted competitive struggle," the federal government's complaint says, "the defendants chose instead to corrupt the competitive process. Each agreed to withdraw from a market, guaranteeing the other a monopoly, and in the process depriving consumers in both cities of the continued benefits of the defendants' competition."

The complaint continues: "The defendants immediately capitalized on their market swap by exploiting their new monopolies. In Los Angeles, Village Voice Media began implementing plans to increase significantly advertising rates after eliminating New Times L.A. as a competitive alternative. Similarly, in Cleveland, New Times told advertisers that their rates would increase now that its newsweekly, the Cleveland Scene, was 'the only game in town.' "

California attorney general Bill Lockyer denounced the New Times-VVM deal in a Jan. 27 press statement. "These two companies entered into an unlawful agreement to swap markets and customers by shutting down two weekly newspapers in the only two cities in which they competed head to head," he stated. "By eliminating competition between two major alternative weeklies, the anti-competitive agreement harms local readers, and also hurts area businesses by inflating advertising rates."

The deal violated the federal Sherman Antitrust Act and the state's Cartwright Act, prosecutors charge, and the U.S. Justice Department alleged 12 specific violations, including "allocat[ing] territories and customers among themselves for the readership of, and advertising in, alternative newsweeklies" in L.A. and Cleveland. The complaint also alleges that the two chains sought to block future competition in the markets.

But nobody is going to jail: At the same time federal and state officials filed their charges, they filed a settlement agreement they say will resolve the allegations of antitrust violations and unfair competition against the two companies.

New Times and VVM have signed on to the consent decree, which both sides say should end the case. It requires both companies to help create new competitors to their Los Angeles and Cleveland papers by selling assets, including the right to use the names of the two closed papers, the Cleveland Free Times and New Times L.A.

The two largest chains in the alternative weeklyindustry also must refrain from enforcing agreements that limited advertisers and employees from doing business with competitors and must let Los Angeles and Cleveland advertisers who were forced to pay higher rates as a result of New Times and VVM's marketplace collusion out of their contracts.

In addition, each company must pay $305,000 in civil penalties to the state of California and an additional$70,000 toward costs incurred by the state in prosecuting the case.

An antitrust expert praised the settlement, saying it should solve the problem by paving the way for the two companies to once again face competitors in the L.A. and Cleveland markets.

"This looks pretty fair," Don T. Hibner Jr., an attorney with the L.A.-based firm Sheppard, Mullin, Richter and Hampton who has40 years' experience in antitrust law, told the Bay Guardian. Hibner has said he thought the state and federal justice officials had a strong case against the two media companies.

"Requiring assets to be sold to a new company so there will be a new alternative newspaper and thereby restoring competition that used to be in the market  that's a classic way to resolve this. It makes economic sense, and they are not letting them off easy," he said.

Under the settlement, neither New Times, which owns 11 papers in markets that include Phoenix, Denver, and Miami, nor VVM admitted any wrongdoing.

Indeed, New Times executive editor Mike Lacey crowed about the results to staffers in a Jan. 27 memo that characterized New Times as a victim of inappropriately zealous regulatory control on the part of federal and state officials.

"The Fat Lady has sung  and she looks a lot like John Ashcroft," Lacey wrote. "The drone bees are no longer in our eyes."

Lacey and VVM officials have maintained that alternative papers do not represent a "discreet market," meaning mainstream daily newspapers, television stations, and other media outlets all compete with alternative weeklies for the same advertisers and readers.

But justice officials  and common sense  didn't see it that way.

"Alternative newsweekly publications provide an alternative perspective to the established news-gathering organizations," the complaint says. "Their popularity with readers continues to be driven largely by a unique editorial mix of politics, investigative reporting and entertainment issues, all with a local focus."

Nobody at New Times returned calls seeking comment. But Lacey and New Times cofounder Jim Larkin told the New York Times Jan. 27 that their Cleveland and Los Angeles enterprises were in serious trouble. "They were failing businesses," Larkin told the paper.

That's consistent with a key element of the Justice Department's case: New Times was unable to thrive in a market where there was real competition and was desperate to gain a monopoly position. "In markets where they faced no direct alternative newsweekly competitor," the federal complaint reads, "both defendants had double-digit annual profit margins. However, in Cleveland and Los Angeles ... their profit margins were pinched."

In 2001, the complaint charges, New Times approached VVM to discuss a corporate merger "as a way of gaining more flexibility on raising [ad] rates."

"Those discussions broke down when neither side could agree who would control the combined entity." But "as early as July 2002, New Times proposed the market-allocation concept that the defendants ultimately adopted."

In early October, VVM paid New Times $11 million for its L.A. paper, and New Times paid VVM $2 million for its Cleveland outlet  and both bought-outwere immediately shut down. The two companies agreed not to enter the other's market for at least 10 years.

The fact that each side threw millions at the other was a red flag that some sort of divvying up of markets was taking place, according to a former head of the Federal Trade Commission.

Robert Pitofsky was quoted in the Jan. 27 New York Times as saying, "When two firms, regardless of what they sell, say 'You stay West and I'll stay East,' that is cartel behavior and is illegal."

While New Times and VVM claim they did nothing wrong, justice officials laid out a strong case.

"Village Voice Media's chief financial officer succinctly summarized the deal's effect: 'This transaction effectively ends the war,' " the complaint states. "As one of Village Voice Media's Board Directors explained to his CEO, 'what we are paying for is for them [New Times] to go away forever.' "

The settlement allows the two companies to keep the proceeds of the deal and to also keep revenues from the auction of the two closed papers' assets. The consent decree won't be final for 60 days and must be approved by a federal judge.

"New Times is claiming this is a great victory, but it sure as hell isn't a victory for the people who live in L.A. and Cleveland, and it sure as hell isn't a victory for the alternative press, which was founded to compete with the big chains, not to act like them," Bay Guardian editor and publisherBruce B. Brugmann said.

"As the Justice Department investigation found, for New Times and VVM, the deal was all about raising ad rates and guaranteeing monopoly profits to the maximum, with arrogant contempt for the readers, advertisers, and marketplace of ideas in the two cities," Brugmann continued. "The maximum rates and profits were needed to service their debt to venture capital and bank backers. The good news is that the Justice Department forced the issue into the public arena and exposed the truth: that these two chains would do damn near anything to end competition and monopolize the market."

P.S.: According to the Justice Department, the proposed consent
decree, along with the department's competitive impact statement,
will be published in the Federal Register. Written comments concerning
the proposed decree may be submitted during the 60-day comment period
to James R. Wade, Chief, Litigation III, Antitrust Division, U.S.
Department of Justice, 325 Seventh St. N.W., Suite 300, Washington,
D.C. 20530-0001. At the conclusion of the comment period, the court
may approve the consent decree upon a finding that it serves the public
interest.E-mail Savannah Blackwell at savannah@sfbg.com.